Baltic Startup Scene – Techcrunch Speech

Here is more or less what I presented at Techcrunch Nordic in Stockholm, with some extra stuff that I cut because of time limits.

If someone would like to hear more about Baltic startup web and product development opportunities, feel free to get back to me. Besides our company there are tens of great software development companies, small and large, and hundreds of great private developers available.

Thanks to all participants, it was a great event. Hopefully we will have a Techcrunch event in Estonia soon, keep your fingers crossed!

My Background

I’m a very old man, in Internet years that is. I started with web development and online marketing 15 years ago, back in 94, designing the first commercial websites in Estonia.

Since then, half of the years I have been working focused on the local market of my home country, half regionally either across the 3 Baltic states or 10 countries in Central and Eastern Europe.

Half of the time I have been dealing with boring old enterprise IT services, pure corporate & B2B stuff, half with consumer-oriented online services.

Corporate vs Consumer – not presented at the event

One thing I have learned is that for startups, depending on what type of person you are, this is a choice each founder and startup has to make: what type of business you want to run.

Servicing the corporate clients has its advantages. In many cases the target groups and customers are easier to identify, market and sell to. The business model and revenue side are easier to be defined, and that can turn into significant revenues already from smaller number of customers. Then again, it does not have the sexiness of telling your friends what you do, having each of them use your services, being well-known on the market, having hundreds of thousands or millions of customers.

For those sexy consumer services, the revenue formula can be non-existant – well, may be not in these times anymore – and target groups hard to market to, as they are just too big. At the same time, many founders do have the urge to service consumers and absolutely hate serving the corporate customers.

Trust your inner feelings and act accordingly. You might be married to your startup for 5-10 years and you don’t want to be doing things you don’t enjoy, at least most of the day 🙂

While many B2B or corporate tech services can be sustainable in smaller countries – not huge, but profitable – it is not so for most consumer services. The markets and revenue streams are just too small. Which brings us to the Baltics.

The Small Baltics

To describe the Baltic attitude, we have to look at what the Baltics are.

Our total population for 3 countries together is just 7m people, a bit less than Sweden and more than Finland. But each of the countries on its own has a population of just 1-3 million people, which is tiny.

The total GDP of the largest Baltic country, Lithuania, is third of Finland, and even the total GDP for 3 of us is less than in Finland. Besides, the business cultures, nationalities and economies are pretty diverse.

That makes it quite hard for smart people to realise their dreams in our countries, just because of size.

Looking at online advertising markets in Baltic countries, these are near 10 million euros per year per country, 90% of which goes to large stagnant media companies, newspapers, leaving very little in online advertising revenues for the startups. The ad networks market share is tiny as well, most of the money going from top brand advertisers to a few top5 sites.

The Baltic Success

At the same time, looking at the technology startup scene, we have done pretty well, especially if you measure the success by exits.

We have had a few large international exits, where the local founding or very early shareholders have made sums of over 50 million dollars each. Most notably these have been two companies, Skype and one of world’s leading casino and online gambling software developers Playtech. I will talk about their models of success and connection to our countries later.

And we have had a multitude of local exits in the range of 10-50 million euros, mostly to Scandinavian media companies in the field of classifieds, car, real estate and job ads or auctions.

How so?

The Good

The Baltic countries, and that applies to most of Eastern Europe, has a long history of strong real sciences, cybernetics and electronics. Our educational system in these areas has been pretty good, especially in fundamentals like mathematics and physics, which has turned out great for technological problem solving skills.

This is the advantage of the Baltics and Central & Eastern Europe: having IT people and software developers with strong creative skills, coming up with new solutions, innovating. Especially when faced with well defined problems, the Baltic tech people take a very strong role in how to solve any problem. You define the problem or goal – our people find new or uncharted ways to solve them. That’s the key difference with for example many Asian outsourced software developers, where quite often you have to very clearly tell them, how to solve the problem. This is no selling of programmng hours.

Our creative and imaginitive designers, analysts and developers are our greatest asset. So what’s the problem?

The Bad and the Ugly

Let’s say your car engine breaks down. How many of you know, how to fix it? Or you have a piece of land and you have to build a house, stone by stone, wood on wood. How long would it take, until you learn it?

Each one of us can learn to fix car engines or build a house. The problem is, it takes time, you make mistakes and you learn much faster among people who have fixed cars or built houses. Doing it on your own, only learning from mistakes, can take years and not turn out a very good result. And if there is competition with existing skills, you fail.

Baltic and Eastern European missing skills are the international sales and marketing skills. We build great products. Exceptional products, in many cases. The thing is, we have no idea, how to sell or market them outside our home country, especially in US and Western Europe. Learning international sales and marketing is a cultural and emotional thing and can take years to master. Because of Soviet heritage, we have none of those skills. Our Estonian top marketing people who have moved from Estonia to run UK or US to run marketing programs for tech companies say, that they have had to learn everything basically from zero. In sales and marketing, we are in a situation like you would need to build a house or fix a car, but have to start learning only from your own mistakes.

This double’s our problems. Our own countries are too small to do anything significant. And going outside is hard, very hard – especially if you have no sales and marketing culture (in addition to no existing contacts) to do that.

Expansion

One of our topics here today is local markets vs international expansion. We all want to go international, not just from the Baltics, but also from the Nordics. But it is very hard to market outside one’s home country.

Back in 2000 I tried to expand my online recruitment company in Estonia simultaneously to around 10 countries in Central and Eastern Europe. Big mistake! The idea was great, the execution sucked. It is so easy to stretch yourself thin and lose focus. I would have been much better off and actually making something by choosing 2-3 key markets and dealt with them. An European country, either small or big, needs a huge amount of focus for an online startup. In many cases you have to do local marketing, local face to face sales, partnerships, customise the product etc. There are only a few exceptions, which can be managed from a distance with little local physical presence. That’s the reason we have very little regional online service chains in Europe.

There’s also a question, where to expand. In Europe you might be much better off risk wise to choose a few EU countries instead of world dominance. Decreasing risks at the same time decreases rewards.

Cooperation model

How can Baltic and Eastern European startups be successful on world markets? One thing: cooperation with Westerners from day one. We doing product development, people from Western Europe or US handling the sales, marketing and business development side of things.

This has been the model to most success stories in our region: Skype, Playtech, Indextools (acquired by Yahoo), LogMeIn in Hungary, various others. One joint feature for them: East/West partnership from almost day one, both local developers and Western (or Israeli) managers shareholders from very early stage.

For tech startups, remember what I said earlier about the role of developers in our region. This is no outsourced software development. People in our region are the product, in many cases they are the ones defining the product or service with just a little help on defining the customer problem, goals and targets. You all use Skype and I am pretty sure most are happy with an Estonian product.

Here today, I urge all of you to consider this. We need to join forces, taking best bits from each country. Product people go and employ good Nordic sales and marketing people, with internationl experience. Those people at the same time should come to the Baltics to develop their products.

Baltic VC’s and Investors

From financing side, I would say the Baltics are in good shape. Our key tech investor is Ambient Sound Investments, the 4 Estonian Skype founding engineers, now having over 100 million euros of their own money to invest. We also have MTVP/MartinsonTrigon, with 3 exited and 6 existing portfolio companies. Most of this activity is focused in Estonia, with also over 50% of Baltic startups coming from Estonia.

There are also organisations nurturing and connecting startups and entrepreneurs, like Connect Estonia (I am a board member). Both Tallinn and Vilnius have OpenCoffee Club networks.

Baltic Startups

Estonia

Fits.me – biorobotics for fashion, allowing you to take a picture of yourself and a webshop will show a real clothes fit on a biorobot for you – no more ill-fitting clothes! They won the Itechlaw.org pitch contest in Estonia yesterday.

Fortumo – mobile payments, allowing anyone to launch revenue-generating SMS services in 5 minutes in many countries, being also well developed in Scandinavia.

Programeter – analytical information and report automation for controlling and managing software projects.

The whole ASI portfolio.

Please also check out Tigerprises, a blog covering Estonian startups.

Latvia

Relenta – business collaboration Saas or even research chemicals Molport.

Lithuania

GetJar – the world’s most popular mobile application distribution and developer community, funded by Accel Partners.

Conclusion

To sum it up: our product development and financing are well in shape, if we would know how to sell and market, we would be in heaven!

Visit us, talk to us, let’s do things together!